Philadelphia

A key factor in our current economic downturn has been the rapid shift of consumer consumption, the deleveraging of household debt and the ensuing decline in business production.

Finding a bottom and starting a recovery will require a resumption of consumer confidence.

A review of a key real-time Index of economic conditions and of current consumer tracking polls suggests that people may be beginning recover from the initial shock of this economic contraction and that their natural resilience is creating a foundation for renewed energy in consumer activity.

To gauge just how significant the shock to consumers has been, it’s useful to review a very striking real-time index of the current economic conditions on the Federal Reserve Bank of Philadelphia web site.

Let the experts explain:

The Aruoba-Diebold-Scotti business conditions index is designed to track real business conditions at high frequency. Its underlying economic indicators (weekly initial jobless claims; monthly payroll employment, industrial production, personal income less transfer payments, manufacturing and trade sales; and quarterly real GDP) blend high- and low-frequency information and stock and flow dynamics. Both the ADS index and this web page are updated as data on the index’s underlying components are released.

The average value of the ADS index is zero. Progressively bigger positive values indicate progressively better-than-average conditions, whereas progressively more negative values indicate progressively worse-than-average conditions. The ADS index may be used to compare business conditions at different times. A value of -3.0, for example, would indicate business conditions significantly worse than at any time in either the 1990-91 or the 2001 recession, during which the ADS index never dropped below -2.0.

The relationship between the data helps to capture the immediate trends that are affecting the way the we feel: how many people are losing their jobs, how much money we’re making and how businesses are doing. And the relative difference between the intensity of these occurrences helps to explain why some periods feel worse than others, even if we are experiencing prosperity at a higher-than-average rate.

Looking at the performance of the Index since 2000, you can see just how wide a spread there is between what we have been experiencing and what we’re experiencing now. The Index also captures just how rapid the drop was. The recession at its outset felt like it did in 2001, which despite the social trauma was a fairly mild and quick-turning downturn. Then, last October, the Index fell off a cliff. That experience felt painful and sudden, and it’s easy to see why. All of the measurements of things that make us feel OK — jobs, income, company health — collapsed.

Looking at the Index back to 1960 gives us some more perspective on the dynamics that are affecting our psychology.

First, we’ve had downturns with this significant a human impact at this rapid a velocity in our recent past. The rolling recession of the 1980′s, the time of the great restructuring of American corporate life, went on longer and had periods of equal intensity. The stagflation of the mid-1970′s was even more intense.

However, it’s been a long time since we’ve experienced a downturn of this intensity and magnitude, the Index shows. A couple of generations have entered the work force, are in positions of influence in media, finance and industry. This downturn is like a steam burn: they know they are in pain, but they can’t see the thing that caused it. The feeling is disconcerting and unsettling. It takes a while to adjust.

The Index helps to provide some context for a data source that I like to follow: Gallup’s daily tracking polls.

Below are three key consumer sentiment trackers from Gallup: Happiness, Perception of Standard of Living and Consumer Confidence.

The trends show a re-calibrating over the past few months of the way people are feeling about things. The first measure shows that most American’s experience happiness or discontent within a pretty predictable band. Note the slight change in the trend in November and December of last year: in the midst of the worse Holiday season in decades, with job cuts announced every day, the percentage of people experiencing a sense of well-being increased. (I think it was two-part: the end of a difficult year and the promise of a new administration got people walking with a little bounce in their step again.)

Happiness and Standard of Living aren’t necessarily directly connected, the trend in the next chart suggests. And, the data suggests a shift in consumer sentiments about their future prospects, as slightly more report confidence that their standard of living is getting better than say it is getting worse.

This metric is likely connected to the trends indicated by the Aruoba-Diebold-Scotti Business Conditions Index.

Finally, consumer mood has seen an significant uptick since October, with the number of consumers feeling mixed about current economic conditions climbing from close to 10% to 32% and the number of consumers feeling negative about the economy dropping from over 80% to 61%.

I’d characterize this as cautious optimism. And, since the decline in consumer consumption has been a big driver of the economic downturn, a return of consumer confidence will help  boost the economy.

Taken together, the Gallup and A-D-S data suggests that consumers are adjusting to a new intensity of experience and are building an emotional foundation

for continuing back along their normal lives.

Patterns of consumption will be changed, attitudes about debt revised and new engines of economic growth required. But if these trends bear out, the underlying resilience of the American populace will help us work our way out from this difficult time. And, if these trends are solid, they suggest that we’re bumping along the bottom of the emotional consumer cycle, and that people, who are generally happy and stress-free, just want to get back to the business of living.

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